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IVA Protocol 2014

Sunday, 23rd February 2014

The IVA protocol 2014

The first IVA protocol was introduced in 2008 with the aim of setting standards for the benefit of consumers, creditors and insolvency practitioners and a framework within which to work. However it did not fully address how to best deal with house equity (the difference between the mortgage and the valuation of the home) if the home was owned by the debtor.

The new IVA Protocol 2014 now deals with this issue and has improved the standard framework for dealing with straightforward consumer IVAs. The Protocol applies to both IVA providers and creditors and IVAs being proposed under 2014 protocol will now be referred to as a Protocol Compliant Individual Voluntary Arrangement (PCIVA).

IVA provider means both insolvency practitioners and IVA provider firms employing insolvency practitioners. References to creditor in this protocol refer to both creditors and the agents who vote on their behalf and act in accordance with their instructions in relation to an IVA.

Those creditors who are members of the British Bankers’ Association (BBA) have indicated their support for the protocol process and will abide by the terms of the protocol in relation to proposals drawn up on that basis. A full list of BBA members can be found here www.bba.org.uk

Below we have selected the key elements to the PCIVA

The straightforward consumer IVA

Not all cases can be classified as a straightforward consumer IVA. A person suitable for a straightforward consumer IVA is likely to be:

In receipt of a regular income either from employment or from a regular pension.

Have 3 or more lines of credit from 2 or more creditors.

The protocol is suitable for both home owners and non home owners. There should be no circumstances where the individual would be forced to sell their property instead of releasing equity. The only exceptions would be where this was proactively proposed by the individual.

Age is not a consideration either, nor is the debt level, though both factors will impact on the overall viability of the IVA.

When the PCIVA will not apply

Not all consumers will be suitable for a Protocol compliant IVA but they may be suitable for an IVA under the former Protocol.

Below are examples of when the PCIVA will not be suitable.

Disputed debts - there should be no known material disputes in relation to the debt

Investment properties - those with investment properties would not be suitable for a straightforward consumer IVA

Possibility of full and final settlement - where a full and final settlement is possible in the first year.

Self-employed PCIVA

A reasonably steady income stream is necessary in order to be suitable for the application of the protocol. There is nothing to prevent this protocol being applied to individuals who are self-employed, when that self-employment produces regular income. Where income is uneven/unpredictable, (e.g. people with more than 20% of their income coming from bonuses or commission), this should be highlighted in the proposal and the accompanying summary sheet.

The protocol does not require that the debtor has to follow the protocol process, even though his or her situation may fit within the definition of a straightforward consumer IVA. Where this occurs, but elements of the protocol are still used, this should be highlighted in the proposal and the accompanying summary sheet. This will be completed by your IVA nominee.

Individual Voluntary Arrangement (IVA) Expenditure

The expenditure statement should be forward-looking and in line with the debt charity guidelines or the Common Financial Statement (CFS). Generally, there should be no deviation from the expenditure guidelines. However, where additional expenditure is necessary, for example due to special dietary requirements or increased heating bills due to caring for elderly relatives or above average work-related travel costs, this should be clearly explained.

Where the debtor is below the age of 55 at date of entry into the IVA, only minimum contributions to the pension scheme should be allowed. Where the debtor is aged 55 or above at the date of entry into the IVA, an average of the last 6 months’ pension contributions should be allowed, subject to a contribution limit of £75 above the minimum pension contribution allowed by the scheme per month. If no minimum contribution is stated by the scheme, debtor contributions will be restricted to 4% of the debtor’s gross salary. Where the debtor is a member of multiple schemes, these limits should be applied to the aggregate amount of the debtor’s contributions.

During the IVA - Home equity (Net worth)

Six months prior to the expiry of the IVA (hereinafter referred to as the review date), there should be an attempt to release the debtor’s net worth in the property. The review date would normally be after month 54, unless the IVA has been extended for any reason. However, subject to * below, where the debtor is unable to obtain a remortgage, the supervisor will have the discretion to consider accepting one of the following alternative proposals:

a third party sum equivalent to 85% of the value of the debtor’s interest in the property; or

12 additional monthly contributions (with the aggregate sum paid to the supervisor being limited to 85% of the value of the debtor’s interest in the property).

The amount of the net worth to be released will be based upon affordability from income and will leave the debtor with at least 15% of his/her net worth in the property. Remortgage includes other secured lending such as a secured loan. A remortgage may result in higher interest rates. Where it is appropriate to remortgage the property, the specific limits will be:

Remortgages would be a maximum of 85% Loan To Value (LTV).

The incremental cost of the remortgage, including cost of any new repayment vehicle, will not exceed 50% of the monthly contribution at the review date.

The net worth released will not exceed 100p in the £ excluding statutory interest.

The remortgage term does not extend beyond the later of the debtor’s State retirement age or the existing mortgage term.

The amount of money introduced into the arrangement will be the mortgage proceeds less the costs of the remortgage, including any costs to redeem any existing mortgage and/or secured loan

*If the amount of the debtor’s net worth net of remortgage costs in the home at the review date is under £5k, it is considered de minimis, and does not have to be released, and there would be no adjustment to the IVA term.

The monthly payments arising from the remortgage will be deducted from the contribution. If the increased cost of the mortgage means that monthly contributions fall below £50 per month, such monthly contributions are stopped, and the IVA is concluded.

The debtor should be provided with a clear written explanation illustrating the possible net worth to be released, taking into account:

no increase in property value as stated in the proposal

the current value inflated by 4% pa (simple interest) at the review date

the estimated outstanding mortgage at the review date.

At the time the debtor is asked to release the net worth in his/her property, the supervisor, or a suitable member of his/her staff, must advise him/her that he/she should seek advice from an independent financial adviser, such advice to include the most appropriate mortgage vehicle and the length of the proposed repayment term.

For the purpose of the release of net worth the property shall be subject to an independent professional valuation on an open market basis.

Use of discretion, variation and failure

The debtor will be required to increase his/her monthly contribution by 50% of any increase in the net surplus as shown in the original proposal following any review.

The supervisor will be able to reduce the contribution by up to 15% in total (relative to the original proposal or last agreed variation) without referring back to creditors, to reflect changes in income and expenditure, such change to be reported in the next annual review.

If you are made redundant whilst in an IVA, you must:

Inform your supervisor within 14 days of notice of redundancy, regardless of whether you have received or is to receive any redundancy payment;

Inform your supervisor of the amount of any redundancy payment within 14 days;

Pay to the supervisor within 14 days of receipt of any redundancy payment any amount in excess of 6 months net take home pay (as set out at the last annual review date). If there is no amount in excess of 6 months net take home pay no payment is required;

Where possible, continue to make monthly contributions into the IVA as set out at the last annual review date;

Keep the supervisor informed of any changes in employment status.

Where you are unable to make contributions this will be reviewed by the supervisor.

At the point new employment is obtained the supervisor will review your IVA contributions and at that point there will be an expectation that any remaining redundancy funds will be paid into the IVA, and your performance in this regard will be reported to creditors. Failure to disclose any such entitlement to redundancy payment will be considered a breach of the IVA.